COVID-19 and annuity policyholder behavior: Looking back, looking ahead

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Executive Summary
We review 2020 annuity policyholder behavior, comparing actual experience to our March 2020 forecasts. The effects of COVID-19 – both expected and unexpected – suggest important lessons for future modeling and assumption-setting.Read more

Market turmoil: What does it mean for annuity policyholder behavior?

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Executive Summary

We offer insights on expected annuity policyholder responses to recent financial market turmoil, gleaned from our studies of annuity policyholder behavior since 2007.

Variable annuity writers should expect:

  • Greater persistency overall, but elevated surrenders for at-the-money GLWB
  • Greater income utilization, especially for GLWB after the deferral incentive period and “hybrid” GMIB
  • Greater GMIB annuitization elections, especially on traditional “pro-rata” benefit forms

Fixed indexed annuity writers should expect:

  • Greater persistency for GLIB, and lower persistency without GLIB
  • Greater income utilization for GLIB

COVID-19 impact on mortality:

  • Will likely depend on the level of containment among the general population at retirement ages, with potential differences between those with and without living benefit guarantees

Ruark is uniquely positioned to help as risk management takes center stage:

  • We have the data from past times of crisis –monthly policyholder behavior and mortality data going back to 2007 covering about 70% of the market with over $1 trillion of current account values
  • We have developed predictive analytics techniques that use company- and industry-level data to help our clients improve their annuity pricing, valuation, and risk management models. Our approach is rigorous, transparent, and tailored to each company, allowing for quick implementation and quantification of improvement in financial risk profile from what they can do if limited to their own data.

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Industry Experience Studies

Insurance companies have always performed experience studies, but the needs for these studies have increased dramatically and will continue to do so.  Product designs have become more complicated.  Principle based reserves and required capital require significant knowledge of historical experience in order to establish appropriate assumptions.

Experience studies must satisfy the following criteria to be of maximum value:

  • Reliable data
  • Sufficient volume of data
  • Retain value of business information
  • Detailed breakdowns to see trends
  • Analysis and understanding
  • Availability of internal staff
  • Timeliness

Ruark Consulting has in-depth expertise conducting experience studies for our clients.  Many have been performed on a multi-company basis, while others have been done for specific needs of individual clients.  Topics studied have included mortality as well as policyholder behavior such as persistency and living benefit utilization.  Ruark Consulting addresses the necessary criteria via:

Reliable data – A large portion of our time is spent scrubbing the client’s data.  Our experienced actuaries review this data, often finding issues that the client was unaware of.

Sufficient volume of data – Our multi-company studies pool data from all participating companies.  Confidentiality of each company’s contribution is maintained.  Aggregation of results dramatically reduces the noise that masks trends in any individual company’s results.  Each participating company can compare its own results to those of the aggregate group.

Retain value of business information – The experience data contributed by participating companies has significant business value.  Ruark Consulting’s study results are only available to the participating companies and are not sold to outsiders.

Detailed breakdowns to see trends – Our studies take an in-depth look at many factors that can affect experience, allowing superior cause-and-effect determinations.  This analysis is particularly effective when multiple companies’ data can be combined, resulting in improved statistical significance at finer breakdowns.

Analysis and understanding – The numerical results of our studies are combined with analysis reports that allow management to quickly get to the actionable information.

Availability of internal staff – Internal client company resources have rarely kept pace with the accelerated needs from experience studies.  Ruark Consulting’s studies can provide the critical information needed by company management and free up scarce internal resources for other priorities.

Timeliness – Ruark Consulting’s experience study results are available within several months of the close of the data collection period, while other studies often have lags measured in years.

Ruark Consulting’s experience studies are the timely, cost effective way to improve the quality of the historical information available to your company for modeling and management decision making.  If you would like to learn more about these opportunities, please contact:

Variable & Indexed Annuity Reinsurance

While effective hedging of investment risks has rightly been the focus of variable annuity companies for the last few years, the enormous longevity risk implicit in living benefit guarantees has gone largely unnoticed and unmanaged.  This longevity risk is due to the fact that if and when living benefit guarantee claims are triggered, they typically take the simple form of a life annuity.  While this helps retirees mitigate the risk of outliving their assets, variable annuity companies risk that long-term increases in human longevity will outpace the level of longevity priced into the living benefit guarantee.

Three facts exacerbate this risk:

  1. There is no industry experience for living benefit guarantees in the payout phase;
  2. Industry mortality experience in the accumulation phase does not follow standard mortality tables;
  3. Demographers have a long history of severely underestimating mortality improvements, by as much as 5 years life expectancy at birth.[1]

Let’s quantify with a simple example.  With the illustrative assumptions of a male age 60 buyer and that claims are very unlikely to be triggered in the first ten years, the corresponding underestimation of life expectancy in the payout phase is 2.1 years[2].  For a $10 billion premium block of 5% living benefit guarantees, we would expect perhaps 67% still inforce after 10 years.  So the additional 2.1 years of payments would cost the variable annuity company $700 million ($10 billion x 5% x 67% x 2.1 years)!  This is equivalent to an additional cost of 1.40% annually on the declining asset balance, for a feature with only about a 1.00% policyholder charge.

We do not think that this level of longevity risk is within the risk appetite of many variable annuity companies.  How can it be managed?  Longevity reinsurance.  Similar to longevity swap products in the pension market, the variable annuity company and reinsurer would essentially swap the contingent living benefit guarantee payments modified for longevity deviations relative to a negotiated benchmark.

Some modifications would be necessary for the variable annuity living benefit guarantee market.  For variable annuities, we would expect the benchmark to reflect a customized blend between industry mortality experience in the accumulation phase and standard mortality tables in the payout phase, such as the Ruark Mortality Table and 2012 Immediate Annuity Table.  The reinsurance volume and coverage period would be set at the start of the transaction in order to mitigate policyholder behavior risk.  For example, the variable annuity company might expect that a $10 billion premium block of 5% living benefit guarantees would likely have 55-67% still inforce when the earliest claims are triggered after 10-15 years, so they might seek longevity reinsurance for $275 million ($10 billion x 5% x 55%) of annual lifetime payments triggered in that period.  Longer deferrals of the coverage period would naturally result in more conservative pricing, and reinsurers would likely require a modest premium stream as compensation for the risk that the payout phase is never triggered.

This type of longevity reinsurance is a creative extension of our expertise in the development, placement, and administration of mortality reinsurance.  We believe that as variable annuity companies recognize the enormous longevity risk embedded in living benefit guarantees, longevity reinsurance will join hedging programs and mortality reinsurance as indispensable modern tools for the management of their investment and insurance risks.  If you would like to learn more about how we can design and implement a longevity reinsurance program to meet your company’s needs, please contact:

Tim Paris, FSA, MAAA
Chief Executive Officer
(860) 866-7786

[1] Brian C. O’Neill, Deborah Balk, Melanie Brickman, and Markos Ezra, “A Guide to Global Population Projections”, Demographic Research, 4, p. 203-288, 2001.  Chris Shaw, “Fifty Years of United Kingdom National Population Projections:  How Accurate Have They Been?”, Population Trends, 128, Office for National Statistics, 2007.

[2] Timothy Paris, “Modern Variable Annuity Risk Management”, p. 6, 2012.

Fixed Indexed Annuity (FIA) Reinsurance

Fixed annuity and indexed annuity reinsurance is a market where Ruark Insurance Advisors has significant experience, along with variable annuities and life insurance.  This article reviews the basic parameters that a direct writer should understand in order to evaluate the applicability of fixed and indexed annuity reinsurance to their situation.

Annuity reinsurance is a tool to manage required capital, surplus strain and a company’s balance between asset risks and insurance risks.  Limiting sales volumes can achieve similar results but may conflict with strategic needs to maintain or grow sales volumes and to enhance relationships with distributors.

Quota share reinsurance of all inherent risks is the most common structure.  This is a permanent transaction where the reinsurer would be on the risk for their share of asset performance, disintermediation, expense and persistency; and would receive their share of the evolving profits.  Business covered can be an inforce block, new business flow or a combination.

Most of the reinsurers active in the fixed and indexed annuity market consider investment management to be one of their core strengths, so the direct writer must be willing to include the reinsurer in asset management.  Assets can either stay on direct writer’s books with an agreement on who will manage them, or assets can be transferred to the reinsurer.  If assets are transferred to the reinsurer, Ruark Insurance Advisors recommends that a trust be established for the benefit of the direct writer.  The requirements of such a trust should go beyond the regulatory trust requirements for receiving reserve credit, and should be geared towards the likelihood of the assets in the trust being sufficient to satisfy the reinsured liability.

Fixed and indexed annuity reinsurance programs are time consuming to negotiate.  Prior to considering reinsurance, maintaining and maximizing profits on annuity business consumes significant senior management time.  The direct writer and a reinsurer must develop an understanding of how this management protocol will be shared.  Negotiation of a reinsurance program should be expected to take a minimum of six months, and sometimes considerably longer.

Fixed and indexed annuity reinsurers are not typically the normal North American life mortality reinsurance players.  Ruark Insurance Advisors can help a direct writer identify appropriate reinsurers.  Treaty terms and structures vary, with heavy reliance on negotiations specific to the facts and circumstances of each direct writer’s situation.  Ruark Insurance Advisors has the experience to guide our clients through these discussions.